Alexander M. Cutler, Eaton chairman and chief executive officer, said, "Our third quarter operating earnings were in the middle of our guidance, despite the global financial instability experienced during the quarter. Sales growth of 25 percent in the quarter consisted of 4 percent from organic growth, 19 percent from acquisitions, and 2 percent from exchange rates. Our end markets grew by 2 percent this quarter and we outgrew end markets by 2 percent.

"Eaton's diversification strategy is working. Our improved geographic and business balance allowed us to post strong earnings despite the turmoil in world financial markets," said Cutler. "Our margin performance in the third quarter was also strong, with our largest segment -- Electrical -- realizing a record operating margin before acquisition integration charges of 14.1 percent.

"The severe issues in world financial markets have started to impact markets for our products. While it is not possible to forecast with precision the prospective impact upon our end markets, prudence suggests anticipating a significant slowdown," said Cutler. "While our year-over-year end market growth in the third quarter was 2 percent, we anticipate fourth quarter growth in our end markets to be flat with the prior year.

"Accordingly, we now anticipate that fourth quarter net income per share will be between $1.55 and $1.65 and operating earnings per share, which exclude charges to integrate our recent acquisitions, will be between $1.70 and $1.80," said Cutler. "Note that acquisition integration charges are expected to rise in the fourth quarter compared to the level in the third quarter as we continue to integrate our recent electrical acquisitions.

"For the full year, due to our reduced outlook for the fourth quarter, we anticipate that net income per share will be between $7.10 and $7.20, and operating earnings per share will be between $7.45 and $7.55," said Cutler.

Business Segment Results

Third quarter sales for the Electrical segment were $1.94 billion, up 59 percent over 2007 and a quarterly record. Operating profits in the third quarter were $259 million, also a quarterly record. Operating profits before acquisition integration charges of $14 million were $273 million, up 71 percent over results in 2007.

"End markets for our electrical business grew about 4 percent during the third quarter," said Cutler. "Despite the difficulties in the financial markets, the global electrical distribution and control markets and electrical power quality markets have held up well, although there are early indications that markets are beginning to slow. As a result, we expect end market growth in the Electrical segment over the balance of the year to be closer to 2 percent.

"We are very pleased with the record 14.1 percent operating margin we achieved in the quarter, reflecting the enhanced balance and performance of our electrical business," said Cutler. "Our electrical business continues to benefit from a strong order backlog, with orders in the quarter up 6 percent over the third quarter of 2007.

"Among significant new business received in the third quarter was a contract with BT for the supply and installation of DC power systems and related products," said Cutler. "Revenues over the four-year life of the contract are estimated to total $100 million."

In the Hydraulics segment, third quarter sales were $638 million, 7 percent above the third quarter of 2007. Hydraulics markets in the third quarter grew 3 percent compared to the same period in 2007, with U.S. markets up 3 percent and non-U.S. markets up just under 4 percent.

Operating profits in the third quarter were $71 million. Operating profits before acquisition integration charges were $72 million, up 14 percent compared to a year earlier.

"The U.S. and European hydraulics markets experienced a lower growth rate in the third quarter compared to the second quarter," said Cutler. "We anticipate that the rate of growth in the fourth quarter will likely decline more, but still remain positive.

"We have expanded our European hydraulics business with the acquisition at the beginning of October of Integrated Hydraulics, a U.K. manufacturer of screw-in cartridge valves and manifold systems," said Cutler.

The Aerospace segment posted third quarter sales of $469 million, an increase of 12 percent over the third quarter of 2007. Aerospace markets in the third quarter grew 2 percent. Non-U.S. markets are estimated to have grown 15 percent, driven by strong deliveries by Airbus, while U.S. markets declined 5 percent, driven by a significant decline in shipments of new aircraft from Boeing as a result of the strike.

Operating profits in the third quarter were $75 million. Excluding acquisition integration charges of $4 million, operating profits were $79 million, an increase of 10 percent over the third quarter of 2007.

"The U.S. markets were impacted in the quarter by the strike at Boeing and a reduction in the size of commercial airline fleets," said Cutler. "We anticipate aerospace markets to grow 2 percent in the fourth quarter.

"In early October we were awarded a contract with Embraer to supply four systems on the new Legacy 450 and 500 business jets," said Cutler. "We anticipate revenues of $100 million over the life of these programs."

The Truck segment posted sales of $620 million in the third quarter, up 15 percent compared to 2007. Truck markets in the third quarter were up 6 percent, with U.S. markets up 3 percent and non-U.S. markets up 11 percent. Operating profits were $95 million, the same as in 2007.

"Third quarter production of NAFTA heavy-duty trucks totaled 51,000 units, about 12 percent less than in the second quarter," said Cutler. "We expect that production in the fourth quarter will decline further. As a result, we estimate full-year NAFTA heavy-duty truck production will total 200,000 to 205,000 units. The lower volumes in the NAFTA heavy-duty truck market are being offset somewhat by continued strength in the Brazilian vehicle and agricultural equipment markets.

"We are very pleased with the 15.3 percent operating margin posted by our truck business in the quarter," said Cutler. "The margin reflects the diversity of our products and operating geographies, as well as the success of our reconfigured manufacturing footprint."

The Automotive segment posted third quarter sales of $446 million, down 14 percent from the third quarter of 2007. Automotive unit production in the third quarter declined 6 percent, with North American production down 17 percent and production outside the U.S. up 2 percent compared to the third quarter of 2007.

Operating profits in the third quarter were $18 million. Operating profits before acquisition integration charges were $19 million, down 63 percent compared to the third quarter of 2007.

"The North American markets were weak all quarter, and Europe, Brazil and China weakened dramatically toward the end of the quarter," said Cutler. "The sharp market slowdown, as well as continued shifts in mix to smaller vehicles in the U.S., impacted our margins in the quarter. For the balance of the year, we anticipate conditions in the U.S. and Europe to weaken further. In developing countries, we also expect modestly slower growth.

"We completed the acquisition of the engine valves business of Kirloskar Oil Engines early in the third quarter," said Cutler. "This acquisition gives us a good position in the Indian car market, and is a significant addition to our global capabilities."

Eaton Corporation is a diversified power management company with 2007 sales of $13 billion. Eaton is a global technology leader in electrical systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. Eaton has 82,000 employees and sells products to customers in more than 150 countries. For more information, visit www.eaton.com.

Notice of conference call: Eaton's conference call to discuss its third quarter results is available to all interested parties as a live audio webcast today at 10 a.m. Eastern time via the microphone on the right side of Eaton's home page. This news release can be accessed under its headline on the home page. Also available on the Web site prior to the call will be a presentation on third quarter results, which will be covered during the call.

This news release contains forward-looking statements concerning the fourth quarter 2008 and full year 2008 net income per share and operating earnings per share, the performance of our worldwide markets, and revenues under customer contracts. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside the company's control. The following factors could cause actual results to differ materially from those in the forward-looking statements: unanticipated changes in the markets for the company's business segments; unanticipated downturns in business relationships with customers or their purchases from us; competitive pressures on sales and pricing; increases in the cost of material, energy and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; the impact of acquisitions, divestitures, and joint ventures; new laws and governmental regulations; interest rate changes; stock market fluctuations; and unanticipated deterioration of economic and financial conditions in the United States and around the world. We do not assume any obligation to update these forward-looking statements.

Financial Results

The company's comparative financial results for the three months and nine months ended September 30, 2008 and 2007 are available on the company's Web site, www.eaton.com.

EATON CORPORATION
COMPARATIVE FINANCIAL SUMMARY
(Millions except for per share data)                              Three months ended             Nine months ended
                                                                  September 30                   September 30
                                                                  2008             2007          2008              2007
Continuing operations
                                 Net sales                        $    4,114       $    3,298    $    11,889       $    9,659
                                 Income before income taxes            354              263           994               782
                                 Income after income taxes        $    315         $    238      $    892          $    707
Income from discontinued operations                                                     20            3                 31
Net income                                                        $    315         $    258      $    895          $    738
Net income per Common Share assuming dilution
Continuing operations                                             $    1.87        $    1.59     $    5.55         $    4.71
Discontinued operations                                                                 .12           .02               .20
                                                                  $    1.87        $    1.71     $    5.57         $    4.91
Average number of Common Shares outstanding assuming dilution          168.4            150.4         160.8             150.2
Net income per Common Share basic
Continuing operations                                             $    1.90        $    1.62     $    5.63         $    4.80
Discontinued operations                                                                 .13           .02               .21
                                                                  $    1.90        $    1.75     $    5.65         $    5.01
Average number of Common Shares outstanding basic                      166.2            147.0         158.4             147.3
Cash dividends paid per Common Share                              $    .50         $    .43      $    1.50         $    1.29
Reconciliation of net income to operating earnings
Net income                                                        $    315         $    258      $    895          $    738
Excluding acquisition integration charges (after-tax)                  14               11            34                29
Operating earnings                                                $    329         $    269      $    929          $    767
Net income per Common Share assuming dilution                     $    1.87        $    1.71     $    5.57         $    4.91
Per share impact of acquisition integration charges (after-tax)        .08              .08           .21               .20
Operating earnings per Common Share                               $    1.95        $    1.79     $    5.78         $    5.11
See accompanying notes.

EATON CORPORATION
STATEMENTS OF CONSOLIDATED INCOME
(Millions except for per share data)                            Three months ended                  Nine months ended
                                                                September 30                        September 30
                                                                2008                  2007          2008                2007
Net sales                                                       $    4,114            $    3,298    $   11,889          $   9,659
Cost of products sold                                                2,964                 2,381        8,565               6,954
Selling & administrative expense                                     659                   530          1,915               1,565
Research & development expense                                       117                   86           317                 251
Interest expense-net                                                 37                    37           119                 108
Other (income) expense-net                                           (17    )              1            (21     )           (1     )
Income from continuing operations before income taxes                354                   263          994                 782
Income taxes                                                         39                    25           102                 75
Income from continuing operations                                    315                   238          892                 707
Income from discontinued operations                                                        20           3                   31
Net income                                                      $    315              $    258      $   895             $   738
Net income per Common Share assuming dilution
Continuing operations                                           $    1.87             $    1.59     $   5.55            $   4.71
Discontinued operations                                                                    .12          .02                 .20
                                                                $    1.87             $    1.71     $   5.57            $   4.91
Average number of Common Shares outstanding assuming dilution        168.4                 150.4        160.8               150.2
Net income per Common Share basic
Continuing operations                                           $    1.90             $    1.62     $   5.63            $   4.80
Discontinued operations                                                                    .13          .02                 .21
                                                                $    1.90             $    1.75     $   5.65            $   5.01
Average number of Common Shares outstanding basic                    166.2                 147.0        158.4               147.3
Cash dividends paid per Common Share                            $    .50              $    .43      $   1.50            $   1.29
See accompanying notes.

EATON CORPORATION
BUSINESS SEGMENT INFORMATION
                                                        Three months ended                  Nine months ended
(Millions)                                              September 30                        September 30
                                                        2008               2007             2008                2007
Net sales
Electrical                                              $   1,941          $   1,221        $   5,184           $   3,463
Hydraulics                                                  638                597              1,990               1,790
Aerospace                                                   469                418              1,365               1,175
Truck                                                       620                541              1,812               1,615
Automotive                                                  446                521              1,538               1,616
                                                        $   4,114          $   3,298        $   11,889          $   9,659
Operating profit
Electrical                                              $   259            $   156          $   669             $   415
Hydraulics                                                  71                 61               241                 195
Aerospace                                                   75                 61               207                 161
Truck                                                       95                 95               274                 277
Automotive                                                  18                 51               115                 183
Corporate
Amortization of intangible assets                           (42    )           (19    )         (109    )           (54    )
Interest expense-net                                        (37    )           (37    )         (119    )           (108   )
Minority interest                                           (3     )           (4     )         (10     )           (9     )
Pension & other postretirement benefit expense              (36    )           (42    )         (109    )           (123   )
Stock option expense                                        (7     )           (8     )         (22     )           (22    )
Contribution to Eaton Charitable Fund                                          (16    )                             (16    )
Other corporate expense--net                                (39    )           (35    )         (143    )           (117   )
Income from continuing operations before income taxes       354                263              994                 782
Income taxes                                                39                 25               102                 75
Income from continuing operations                           315                238              892                 707
Income from discontinued operations                                            20               3                   31
Net income                                              $   315            $   258          $   895             $   738
See accompanying notes.

EATON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
                                                          September 30,     December 31,
(Millions)                                                2008              2007
ASSETS
Current assets
Cash                                                      $       181       $       142
Short-term investments                                            282               504
Accounts receivable                                               2,845             2,208
Inventories                                                       1,795             1,483
Deferred income taxes & other current assets                      484               430
                                                                  5,587             4,767
Property, plant & equipment-net                                   2,585             2,333
Goodwill                                                          5,870             3,982
Other intangible assets                                           1,929             1,557
Deferred income taxes & other assets                              996               791
                                                          $       16,967    $       13,430
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt                                           $       1,096     $       825
Current portion of long-term debt                                 345               160
Accounts payable                                                  1,424             1,170
Accrued compensation                                              365               355
Other current liabilities                                         1,272             1,149
                                                                  4,502             3,659
Long-term debt                                                    2,921             2,432
Pension liabilities                                               875               681
Other postretirement liabilities                                  764               772
Other long-term liabilities & deferred income taxes               926               714
Shareholders' equity                                              6,979             5,172
                                                          $       16,967    $       13,430
See accompanying notes.

EATON CORPORATION

NOTES TO THE THIRD QUARTER 2008 EARNINGS RELEASE

Millions of dollars unless indicated otherwise (per share data assume dilution)

ACQUISITIONS OF BUSINESSES

In 2008 and 2007, Eaton acquired certain businesses in separate transactions. The Statements of Consolidated Income include the results of these businesses from the effective dates of acquisition. A summary of these transactions follows:

Acquired business                Date of         Business      Annual sales
                                 acquisition     segment
Engine Valves Business           July 31,        Automotive    $5 for 2007
of Kirloskar Oil                 2008
Engines Ltd.
An
India-based
designer,
manufacturer
and
distributor of
intake
and exhaust
valves for diesel
and
gasoline engines
The Moeller Group                April 4,        Electrical    1.02 billion
A Germany-based                  2008                          for 2007
supplier of
electrical
components for
commercial and
residential building
applications, and
industrial controls
for industrial
equipment
applications
Balmen Electronic, S.L.          March 31,       Electrical    $6 for 2007
A Spain-based                    2008
distributor and
service provider of
uninterruptible
power supply (UPS)
systems
Phoenixtec Power Company Ltd.    February 26,    Electrical    $515 for 2007
A Taiwan-based                   2008
manufacturer of
single and three-phase
uninterruptible power
supply (UPS) systems
Arrow Hose & Tubing Inc.         November 8,     Hydraulics    $12 for 2006
A Canada-based                   2007
manufacturer of
thermoplastic hose
and tubing for the
industrial, food
and beverage, and
agricultural markets
MGE small systems UPS            October 31,     Electrical    $245 for the
business from                    2007                          year ended
Schneider Electric                                             Sept. 30, 2007
A
France-based
global provider of
power quality
solutions including
uninterruptible
power supply (UPS)
systems, power
distribution units,
static transfer
switches and surge
suppressors
Babco Electric Group             October 19,     Electrical    $11 for the
A Canada-based                   2007                          year ended
manufacturer of                                                April 30, 2007
specialty low- and
medium-voltage
switchgear and
electrical housings
for use in the
Canadian oil and gas
industry and other
harsh environments
Pulizzi Engineering              June 19,        Electrical    $12 for 2006
A U.S. manufacturer              2007
of alternating
current (AC) power
distribution, AC
power sequencing,
redundant power and
remote-reboot power
management systems
Technology and related           May 18,         Electrical    None
assets of SMC                    2007
Electrical Products,
Inc.'s
industrial
medium-voltage
adjustable frequency
drive
business
Fuel components division         May 2,          Automotive    $28 for 2006
of Saturn Electronics            2007
&
Engineering, Inc.
A U.S. designer and
manufacturer of fuel
containment and
shutoff valves,
emissions control
valves and specialty
actuators
Aphel Technologies               April 5,        Electrical    $12 for 2006
Limited                          2007
A U.K.-based
global
supplier of high
density,
fault-tolerant power
distribution
solutions for
datacenters,
technical offices,
laboratories and retail
environments
Argo-Tech Corporation            March 16,       Aerospace     $206 for 2006
A U.S.-based                     2007
manufacturer of
high-performance
aerospace engine fuel
pumps and systems,
airframe fuel pumps
and systems, and ground
fueling systems for
commercial and military
aerospace markets
Power Protection Business        February 7,     Electrical    $3 for 2006
of Power Products Ltd.           2007
A
Czech Republic
distributor and service
provider of
Powerware®
products
and other
uninterruptible
power supply (UPS)
systems

On October 2, 2008 Eaton acquired Integ Holdings Limited, the parent company of Integrated Hydraulics Ltd., a U.K. manufacturer of screw-in cartridge valves, custom-engineered hydraulic valves and manifold systems. The company employs approximately 290 people and will be reported as part of the Hydraulics business segment.

ACQUISITION INTEGRATION CHARGES

In 2008 and 2007, Eaton incurred charges related to the integration of acquired businesses. These charges, which consisted of plant consolidations and integration, were recorded as expense as incurred. A summary of these charges follows:

                   Three months ended September 30
                   Acquisition                                          Operating profit
                   integration              Operating profit            before acquisition
                   charges                  as reported                 integration charges
                   2008         2007        2008           2007         2008           2007
Electrical         $   14       $   4       $    259       $    156     $    273       $    160
Hydraulics             1            2            71             61           72             63
Aerospace              4            11           75             61           79             72
Truck                                            95             95           95             95
Automotive             1            1            18             51           19             52
Corporate              1
Pretax charges     $   21       $   18      $    518       $    424     $    538       $    442
After-tax charges  $   14       $   11
Per Common Share   $   .08      $   .08

                   Nine months ended September 30
                   Acquisition                                              Operating profit
                   integration              Operating profit                before acquisition
                   charges                  as reported                     integration charges
                   2008         2007        2008             2007           2008             2007
Electrical         $   24       $   8       $    669         $    415       $    693         $    423
Hydraulics             4            9            241              195            245              204
Aerospace              17           27           207              161            224              188
Truck                                            274              277            274              277
Automotive             3            1            115              183            118              184
Corporate              3
Pretax charges     $   51       $   45      $    1,506       $    1,231     $    1,554       $    1,276
After-tax charges  $   34       $   29
Per Common Share   $   .21      $   .20

Charges in 2008 related to the integration of primarily the following acquisitions: in the Electrical segment, Moeller, Phoenixtec, the MGE small systems UPS business, and Senyuan; in the Hydraulics segment, Ronningen-Petter, Synflex and Hayward; in the Aerospace segment, Argo-Tech, PerkinElmer and Cobham; and in the Automotive segment, Saturn.

Charges in 2007 related to the integration of primarily the following acquisitions: in the Electrical segment, Senyuan and Powerware; in the Hydraulics segment, Synflex, Hayward and Walterscheid; and in the Aerospace segment, PerkinElmer and Cobham.

The acquisition integration charges were included in the Statements of Consolidated Income in Cost of products sold or Selling & administrative expense, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment.

INCOME TAXES

The effective income tax rates for continuing operations for the third quarter and the first nine months of 2008 were 11.0% and 10.3%, respectively, compared to 9.4% and 9.5% for the same periods in 2007.

FINANCING OF THE ACQUISITIONS OF PHOENIXTEC & THE MOELLER GROUP

In February 2008, Eaton borrowed $250 under a 364-day $3.0 billion revolving credit agreement to partially finance the acquisition of Phoenixtec. In April 2008, Eaton borrowed 1.33 billion under the revolving credit agreement to finance the acquisition of Moeller.

In April and May 2008, Eaton sold 18.678 million of its Common Shares in a public offering, resulting in net cash proceeds of $1.522 billion. In May 2008, Eaton issued $300 of 4.9% notes due in 2013 and $450 of 5.6% notes due in 2018. The cash proceeds from the sale of the Common Shares and from the issuance of the notes were used to repay borrowings incurred to fund the acquisitions of Phoenixtec and Moeller, and to repay commercial paper issued under the backstop provided by the $3.0 billion revolving credit agreement. Subsequently, in May 2008 Eaton elected to terminate the $3.0 billion revolving credit agreement.

DISCONTINUED AUTOMOTIVE OPERATIONS

In the third quarter of 2007, Eaton sold the Mirror Controls Division of the Automotive segment for $111 resulting in a $20 after-tax gain, or $.12 per Common Share. The gain on the sale of this business and other operating results are reported as Discontinued operations in the Statements of Consolidated Income.

RECONCILIATION OF FINANCIAL MEASURES

This earnings release discloses operating earnings, operating earnings per Common Share, and operating profit before acquisition integration charges for each business segment, each of which excludes amounts that differ from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of each of these financial measures to the most directly comparable GAAP measure is included in this earnings release in the Comparative Financial Summary or in the notes to the earnings release. Management believes that these financial measures are useful to investors because they exclude transactions of an unusual nature, allowing investors to more easily compare Eaton's financial performance period to period. Management uses this information in monitoring and evaluating the on-going performance of Eaton and each business segment.

SOURCE: Eaton Corporation

Eaton Corporation 
Kelly Jasko, 216-523-5304 
kellymjasko@eaton.com 
or 
William Hartman, 216-523-4501